The digital health sector logged Q3 2022 as its lowest funding quarter since 2019. The three-month period raised only $2.2 Billion across 125 deals, which is 48% less than the previous quarter ($4.2 Bn). It is the lowest in 11 quarters—Q4 2019 raised $2.1 Bn—as reported in Rock Health’s Q3 funding report.
2022 Year-to-date funding amounts to $12.6 B across 458 deals. If the funding trajectory remains the same in the last quarter, the digital health sector might fall short of half of last year’s funding ($29.2 Bn). Leading analysts at Rock Health observe that “the market isn’t the same as it was.”
Digital health funding: Trends observed in 2022
Digital health sector saw a steady rise in investments from 2012 to 2019, raising $1.6 Bn to $8.1 Bn. However, the pandemic caused a surge in investments, and the sector clocked $14.7 Bn in 2020 and jumped to $29.2 Bn in 2021. While the market was expected to slow down in the first half of 2022, analysts believe that the sharp decline in Q3 represents a bigger shift.
Here are a few insights from Rock Health’s Q3 funding report. These give a fair view of trends we can expect in the last quarter and while moving into 2023.
Smaller deal size
2022 saw a reduction in deal size rather than the number of deals. While the overall funding dropped nearly 50% in Q3, the number of deals dropped by just 15%. Rock Health analysts also observed only two megadeals—deals clocking more than $100 Mn—in Q3 2022, compared to 18 in Q1 and 11 in Q2. This is a major decline from 2021, where 88 megadeals took place, averaging 22 megadeals each quarter.
Focus on early-stage funding
The majority of 125 deals that took place in Q3 2022 were for early-stage startups. Late-stage startups logged just 5% of the total deal volume. Mihir Somaiya, a leading analyst at Rock Health, opines that
“Investors are holding back from the market, waiting to strike once things stabilise, given the year’s choppy venture waters and public market correction.”
Shifts in funding allocation
2022 also saw a lot of funding shakeups. “Investors looked forward to complementary businesses to round out their portfolio,” concluded analysts examining investment patterns by value proposition, therapeutic area and technology type.
Funding for R&D for Biopharma and MedTech dropped to $1.7Billion, placing it in third place, while clinical and non-clinical workflow solutions jumped to first place with $1.8 Billion in funding. Analysts observe the priority shift towards addressing healthcare staff shortages and employee burnout bringing in this trend. Healthcare marketplace also saw the effect of this trend becoming the fifth most-funded value proposition.
In the therapeutic area, startups focused on mental health and complex diseases saw the highest funding. Funding in oncology care jumped to second, next to mental health startups.
Funding shakeups were also seen in telemedicine. Being an oversupplied market and showing declining yields on direct-to-consumer advertising, investor interest in telemedicine startups saw a decline. Their attention diverted to immersive and decentralised health-tech enablers.
A sharp decline in late-stage digital health investments
Q3 saw only six funding raises of Series C or higher, seeing a steep down road compared to 19 in Q2 and 32 in Q1. Rock Health analysts explained three major reasons that might be causing this pullback.
- Deals preponed to 2021
2021 was a hot year for digital health investments, as cash was readily available at lower costs. To take the advantage of money on offer, many startups pulled the funding forward last year. Analysis showed that over 60 companies raised funds twice in 2021.
- Deals behind the doors
To avoid publicising cash requirements that might come across as a negative signal, analysts believe founders turned to investors directly with inside rounds, extension rounds, bridge rounds or venture debt behind the doors. This also ensured no impact on their share price.
- Deals postponed
Given the tighter capital markets, analysts see a possibility of many startups “making do by running leaner businesses”. They are forced to streamline operations, cut customer acquisition spending, lay off employees, etc., until the market revives.
Is digital health funding returning to pre-covid numbers?
The digital health sector saw a boom in funding during COVID as health tech emerged as an exponentially growing market. However, given the current macroeconomic factors—inflation, interest rates, supply chain disruption, war climate, etc., and the change in investor mindset, the slowdown in 2022 funding wasn’t unexpected.
“While Q1 and Q2 2022 may have read as adjustment periods coming off of 2021, Q3 represented a clear departure from the COVID-driven digital health financial market, including changing market dynamics, shifts in investor focus to prioritise workflow support and complex diseases, and growing excitement for new technologies and immersive solutions.”
– Rock Health report
We believe digital health investments won’t surge as they did in 2020 and 2021, but they may not return to the low numbers prior to the pandemic, as health is gaining increasing prominence. What do you think? Let us know in the comments.
